Employee tax consequences ― EMI schemes

By Tolley in association with Ken Moody
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The following Employment Tax guidance note by Tolley in association with Ken Moody provides comprehensive and up to date tax information covering:

  • Employee tax consequences ― EMI schemes
  • Grant of option
  • Vesting of option
  • Exercise of option
  • Disqualifying events
  • Sale of shares
  • EMI and entrepreneurs’ relief
  • NIC agreement or election
  • Tax on tax charge
  • Restricted securities election ― general
  • EMI options and restricted securities election

This document covers the employee tax consequences of an EMI option, along with the grant, vesting and exercise of an option; disqualifying events; sale of shares; tax on tax charge; NIC agreement; and interaction with entrepreneurs’ relief and restricted securities election.

 

The tax rules around enterprise management incentive (EMI) schemes are extremely generous and were introduced to enable small higher risk trading companies to recruit or retain key employees. The principal advantage is that where the option price is not less than the market value of the option shares at the time of grant, no income tax charge arises when the option is exercised. Therefore, if there is substantial growth in value of the shares between grant and exercise, that growth is liable only to CGT when the shares are sold. By contrast, if the option is non-qualifying, an income tax charge arises on exercise based upon the market value of the shares at that time. CGT entrepreneurs’ relief is usually available for disposals of EMI shares and so the rate of CGT is reduced to only 10%, making the scheme even more attractive. This note considers the rules on a step-by-step basis.

Grant of option

There is no income tax or NIC charge arising on the granting of an EMI option.

ITEPA 2003, s 475
Vesting of option

Similarly, there is no income tax or NIC charge arising when an EMI option vests, ie becomes available for exercise or vests automatically, eg after a specified period.

Exercise of option

This is the critical point from a tax perspective. There are two different possibilities.

If the option is granted with an exercise price equal to or higher than the actual market value (AMV) at the date of grant, there are, as noted, no income tax or NIC consequences on exercising the option.

ITEPA 2003, s 530

It is important to understand that the AMV for these purposes is not the same as the unrestricted market value (UMV), which is used for the purposes of the £250,000 individual limit on share

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